MauledAgain

Prof. James Edward Maule's more than occasional commentary on tax law, legal education, the First Amendment, religion, and law generally, with sporadic attempts to connect all of this to genealogy, theology, music, model trains, and chocolate chip cookies. Copyright 2004-2019 James Edward Maule.

In the meantime, as summarized in this article, academic and business researchers have studied the impact of the tax. Advocates of the tax and opponents of the tax have found reasons to support and object to each of the studies, almost always reflecting an alignment between their views and the outcome of the study. Generally, it appears that stores have passed some or all of the tax on to customers, sales of beverages containing soda have dropped, and some customers have shifted their shopping to locations outside the city where the tax does not apply, causing sales at stores outside the city limits to increase.

Now comes news that the owner of a Shoprite grocery store in West Philadelphia will close. The owner has explained that because of the soda tax, revenue at the store has dropped from $30.5 million in 2016, before the tax went into effect, to $23.4 million in 2018. The store is just blocks from the city limits, and it would be no surprise to learn that when people go to a store outside the city to avoid the soda tax they also purchase everything else on their grocery shopping list. The Shoprite’s owner concluded that the store has become unprofitable, losing more than $1 million each year since the tax went into effect. This Shoprite is not the owner’s only city grocery store, as he owns six other stores in the city. Those stores also have suffered revenue decreases but not to the extent of the store within blocks of the city limits.

The impact of the closure is unhealthy. The owner had opened this store and the others in what are called “food deserts,” places in cities where access to fresh groceries is limited or non-existent. Customers who shopped at this store despite the soda tax because they lack transportation to stores six, ten, or fifteen blocks away now face serious challenges in finding places to shop for food, even though the owner of the store has suggested he will offer ride shares. Employees of the closed store will be transferred to the owner’s other stores, but as employees of those stores leave, they will not be replaced, adding to the 200 positions already left unfilled because of slumping sales at those other stores. These are rather high prices to pay for a program that is generating less revenue than projected, and that has seen its projected revenue revised downward several times.

A spokesperson for the mayor, the chief cheerleader for the tax, responded by claiming that there was no “evidence that the tax has had any impact on sales.” The evidence I see is rather clear, so it would be helpful to know what sort of evidence the mayor seeks. The spokesperson pointed to several of those studies summarized above, but those did not focus on any particular store or area of the city, but rather looked at overall trends. The mayor continues to insist that because the tax is imposed on beverage distributors, they could absorb it rather than pass it on to customers, but the practical reality of the tax is that it gets passed on to customers.

Imagine if the tax was imposed on all items containing substances harmful to health, and not just beverages that contain sugar. Imagine if the tax did not apply, as it does, to items that are not harmful to health. The impact of the tax would be much less significant, because it would be spread over a much larger array of unhealthy food items, such as doughnuts, pastries, cakes, bacon, cheese curls, candy, and other items that contribute as much, if not more, to the poor health of America as does soda. Imagine if the revenue generated from the tax was used to improve health habits, dietary decisions, and medical care. Imagine if there was a connection between the impact of the tax and the purposes to which its revenues were dedicated. Imagine.

Friday, January 04, 2019

Tax News: Good or Bad?

Three days ago, reader Morris directed my attention to a four-and-a-half-year-old BBC Report that explored why bad news dominates the headlines and television news. All of us are familiar with the teasers that promote the 11:00 evening news on local television stations that almost always highlights a car crash, a shooting, a fire, or some other catastrophic event. When was the last time “Man Finds His Long Lost Sister” the lead story?

Morris asked me a series of questions. He asked:

Do you blog more bad tax news stories than good tax news stories?

How do you define bad vs good tax stories?

Is it possible that the same story or the same tax circumstances could be good news for one or more persons and bad news for one or more persons?

Are you drawn to bad news stories {headlines} when writing your blog? If so, why?

After realizing I had never thought about this perspective on my blog writing, I did a bit of thinking. Here is what I concluded. Stories with bad tax results for someone do get my attention, perhaps because the “Maxine filed her taxes and didn’t get audited” story doesn’t ever appear. And to the extent I am drawn to stories with bad tax results, it’s because the lesson to be learned from what someone did wrong can make a stronger impression on readers than the highlighting of someone’s routine and correct reaction to a tax issue.

Yet it is the third question posed by Morris that is most important. Yes, the same tax story can be good news for one or more persons and bad news for others. Why? To the extent the story is about someone who failed to do something correctly when filing taxes and who was audited, there is bad news for that person but good news for everyone else who has filed correctly. So in some sense, it is not possible to tag a tax story as “good” or “bad” because the adjective depends on the viewpoint of the reader. Thus, perhaps I should conclude that I don’t blog more bad tax stories or good tax stories because all tax stories are both good and bad from a universal perspective. From my own personal perspective, at least some of the tax stories I report and analyze are good or bad, but many of them are both. Consider the story of someone who does something bad with respect to taxes, from my viewpoint and the viewpoint perhaps of most others, but in which I find something good because there is the opportunity to help others avoid the same mistake.

Perhaps a good example of the difficulty in tagging a tax story as good or bad are the commentaries I have shared with respect to the 2017 tax legislation. From the short-term perspective of those who hauled in huge tax cuts, that was a good story. From the perspective of those who did not get any tax cuts, or perhaps a crumb or two, or who even were afflicted with a tax increase, that was a bad story. The long-term perspective might cause some of those who considered the legislation to be good news to change their minds, although there surely will be some who would consider the news to be good no matter what happens.

For me, the primary good news is that there are tax stories on which I can comment. Perhaps for those who disagree with my analyses or dislike my tax philosophy, the bad news is that there are tax stories on which I can comment. The fact that the world will not run out of tax stories is good news or bad news, depending on how a person views that prospect.

Wednesday, January 02, 2019

Tax Ignorance or Bad Writing?

A few days ago, reader Morris directed me to a web site and asked me, “tax ignorance or bad writing.” Curious, I took a look, and spotted several statements at least some of which had inspired reader Morris to send the note to me. Perhaps he saw other questionable statements that I overlooked. Here they are:

* * * For instance, if you receive money from life insurance proceeds, a gift or an inheritance, rather than work-related wages, calculating your taxable income can become more complex. * * *

* * *

The list of what type of revenue is taxable, according to the IRS, is long, but a good way to understand what you should report and what you don't need to is to think about earned income versus unearned income. If you earned it, report it as taxable income. If you didn't earn the income, you probably don't have to report it.

* * *

If you receive long-term disability benefits before you're retired, that's also considered taxable income. Union strike benefits are also taxable, as are jury duty fees. Unemployment benefits are also considered taxable income. So are royalties and license payments, interest or dividends from investments and severance pay from a previous place of employment. Even money you win from a game show is considered taxable income.

* * *

Here are some of the types of income categories that you must pay taxes on:
* * *
Capital gains and losses.
* * *
Rental income and expenses.
* * *
401(k) plans.

* * *

What is nontaxable income?
As a general rule, among what you don't have to report includes gifts and money you inherit, child support payments, welfare benefits, damage awards for physical injury or illness, cash rebates from a dealer or manufacturer for an item you purchase and reimbursements for qualified adoption expenses. Still, there are some exceptions. For instance, while you won't have to pay an inheritance tax on the federal level, six states – Iowa, Kentucky, Maryland, New Jersey, Nebraska and Pennsylvania – currently collect an inheritance tax. Inheriting property versus money can also sometimes involve paying taxes.

My conclusion is that we’re looking at some bad writing. The primary problem is the insistence on trying to define taxable income by listing items that are or are not included in GROSS income, which is not the same as taxable income. Deductions can offset some or all of a person’s gross income. So it is wrong to state that any particular amount of income is included in taxable income because it is premature to determine the impact of that income until deductions are taken into account.

A related problem is the attempt to bunch losses and deductions with gains and income when trying to define income. A person does not “pay taxes on” capital gains and losses. A person must include capital gains in gross income. Capital losses can offset those gains in the process of computing taxable income. Taxes are not paid on capital losses. The same is true of rental expenses.

Nor is it correct to state that if a person receives a gift or inheritance, “calculating your taxable income can become more complex.” Gifts and inheritances are not included in gross income, and thus are not included in taxable income. They are left out of the process, so there is no way they can make the process of computing taxable income more complex. On a related note, the sudden shift into state inheritance taxes is confusing because inheritance taxes have nothing to do with the computation of federal taxable income.

The idea that a 401(k) plan is a type of income is bewildering. Distributions from 401(k) plans are what get considered in determing gross income. Do reimbursements for medical expenses come from life insurance, or do they come from health insurance?

The notion that “a good way to understand what you should report and what you don't need to is to think about earned income versus unearned income. If you earned it, report it as taxable income. If you didn't earn the income, you probably don't have to report it” is completely wrong. Earned income, in the federal income tax world, is income derived from performing services. Some earned income is included in gross income, and some earned income Is excluded from gross income. Unearned income refers to income from investments, and again, some unearned income is included in gross income and some unearned income is excluded from gross income.

I think what leads to the bad writing is the ever-increasing demand for sound bites and tweets, as Americans, and others, seem to be losing the ability to process multi-step analyses, to hear or read comprehensive descriptions, or to understand complete sets of instructions. This tendency to reduce things to overly simplistic sound bites and tweets nourishes the tendency of too many people to look at things as binary possibilities rather than as realities on a spectrum. The article to which reader Morris directed my attention can easily be fixed, but it would require the addition of at least several sentences, or perhaps two or three paragraphs. When the reaction becomes, “Oh, but readers won’t last that long,” I fear that the same could be said of everything else that depends on having attention spans of more than 15 seconds. The willingness to humor and enable those short attention spans leads to bad writing, which in turn increases ignorance, which in turn leads to more bad and erroneous writing, which in turn spirals us down, down, down, eventually into oblivion.

Monday, December 31, 2018

So Which Is It? Good Tax News or Bad Tax News?

Last Wednesday, Channel 10 News in Roanoke, Virginia, published a story in which the owner of a tax preparation company opined that as the 2019 tax filing season approached, most taxpayers filing 2018 federal income tax returns would encounter good news, in the form of lower taxes, because of the 2017 tax legislation. He pointed out that tax brackets “came down a little bit,” that the standard deduction had been increased, and that the child tax credit had doubled.

Last Wednesday, Channel 10 News in Rochester, New York, published a story in which the tax expert at a local accounting firm warned that bad news was on the horizon. He explained that because of the reduction in withholding during 2018, many taxpayers would find themselves receiving smaller refunds than they had received in the past or even find themselves needing to pay more taxes when they file their 2018 returns. He pointed out that most of the tax breaks in the 2017 legislation benefit businesses.

Of course, tax refunds and underpayments are but one piece of a person’s financial situation, though for many people who are accustomed to banking on a refund of a certain size, March and April surely will bring bad news. But even if someone’s refund remains the same, other bad financial news, such as a crashing stock market, price increases and bankruptcies triggered by unwise tariffs, and escalating health care costs exacerbated by lobbying, will continue to combine to make people’s financial situation miserable. Unless, of course, they happen to be among the oligarchs and their acolytes who benefit from this economic instability that undermines the American dream. My conclusion? It’s bad news.

Friday, December 28, 2018

How Not to Dispute a Tax

A guy goes to a restaurant, orders take-out, is presented with the bill, and blows a fuse when he sees that the sales tax has been applied. So what does he do? He pulls a gun on the restaurant’s owner. Law school hypothetical? No. It’s the reality of the insanity. It happened in Cleveland, Ohio, as described in this report.

It indeed is sad that the combination of ignorance and dominant limbic systems is tearing apart the fabric of the species. Is it that difficult to teach, and to learn, that the restaurant owner did not enact the sales tax, nor make it applicable to take-out food? Is it that difficult to grow up and learn how to react sensibly and rationally when encountering a problem in the presence of someone who is not responsible for the problem?

There are arguments for and against sales taxes on food. There are arguments for and against imposing the sales tax on take-out orders but not on in-house dining. Some of those arguments are strong, and others are weak. But the place for dealing with the issue isn’t at the restaurant checkout line. It’s in the legislature’s chamber, in the offices of legislators, in town meetings, in editorials and commentaries, on radio, on television, and in other places where civilized, rational, and intelligent conversation can occur.

Though they didn’t catch the guy, they know who he is. So it’s a matter of time. Perhaps the judge will sentence him to, among other things, attendance at tax school where he can wipe away at least some of his ignorance. Perhaps somewhere there is a “how to grow up and resolve tax problems without a gun” school. If there is, he can take classes there, too.

Wednesday, December 26, 2018

How Not To Practice Law: Fake Taxes

Reader Morris brought my attention to this story out of New Zealand. An attorney included in invoices to clients a $100 charge for what he called a “Land Transfer Tax,” a “Land Transfer Tax Statement,” or a “Land Transfer Tax Statement for LINZ.” Complaints were made, and a lawyer’s standards committee concluded that the lawyer had engaged in unsatisfactory conduct, and had violated the Lawyers and Conveyancers Act because he misled and deceived his clients. The lawyer admitted that the tax did not exist, that the $100 amounts collected from clients were not transferred to a third-party, and that he had been wrong to charge the fake tax to his clients. The committee directed the lawyer to reimburse the clients, and also ordered him to pay $500 in costs.

Why did the lawyer do this? He claimed that he was trying to get compensated for the time he spent trying to learn how to comply with amendments to anti-money laundering legislation. This explanation must be considered in light of the committee’s determination that the lawyer did not disclose to his clients that he was charging additional fees to cover his overhead and additional fees for office expenses. On top of that, the lawyer did not provide proper goods and services tax invoices to his clients.

Perhaps it was the result of carelessness. Perhaps it was the result of a knowing intent to rack up more revenue. Perhaps it was the result of ignorance. Perhaps it was the result of incompetence. Probably it was a combination or two or more of those factors. Whatever it was, it should serve as a lesson to other attorneys, not just in New Zealand but also in the United States and elsewhere. The lesson is simple. Be honest and transparent in dealing with clients.

Monday, December 24, 2018

So a Tax Cut Incentive Didn’t Work As Promised, But I Am Not Surprised

One of the “features” of the 2017 tax legislation providing substantial tax breaks to corporations and the wealthy was a reduction in the tax rate applicable to corporate earnings stashed overseas which had not been brought back into this country because, allegedly, corporate tax rates were too high. So the proponents of the corporate tax breaks argued that lowering the tax rate would bring $4 trillion in cash to come back from overseas. In Another Tax Cut Failure, I explained that according to this Bloomberg report, corporations repatriated $295 billion of earnings during the first quarter of 2018, the quarter after the legislation was enacted, and $184 billion during the second quarter. The report estimated that only between $50 and $100 billion would be repatriated during the third quarter. Now, according to a recent Bloomberg report, the actual amount has been computed, and it is a mere $92.7 billion. According to the same report, a Morgan Stanley analytical team issued a note disclosing that “The sharp drop and trend trajectory is surprising.” Isn’t that baffling? People are surprised that a tax break for large corporations isn’t doing what it was promised to do? In contrast, I would have been surprised had the tax break even come close to having the promised effect. So through three quarters, only $572 billion has returned, barely halfway to ONE trillion dollars, and nowhere near FOUR trillion dollars.

The failure of this giveaway turns out to be worse than expected. The repatriated amounts are not entirely attributable to the tax break. For example, during the third quarter of 2017, before the tax legislation was enacted, corporations brought $55 billion back into the country. So of that $93 billion, only $38 billion can be said to be a consequence of the giveaway. Consider how many companies routinely bring back profits and are now getting a tax break even if they aren’t increasing the amount of profits they are repatriating.

The tax break should have been limited to the increase in repatriated earnings. That’s the same approach I have proposed for job creation tax cuts, namely, prove that the jobs were created and then there is a tax break. So prove that more profits were repatriated than had been repatriated in previous years, and then there is a tax break. I’ve yet to be given a good reason to ignore that approach.

The trend is clear, and it would not be surprising to see the amount of repatriated profits drop even more during the fourth quarter of 2018. Even if one is generous and assumes that quarterly repatriation remains level at $90 billion, it will take ten more years to bring back a total of $4 trillion in profits stashed overseas. According to that recent Bloomberg report, the director of fiscal policy as American Action Forum has suggested that the amount of profits stashed overseas is closer to $2.5 trillion. So, once again, false promises have been dished out to Americans in order to funnel more money into the hands of starving wealthy individuals and bankrupt corporations awash in cash and profits. Will Americans continue to vote for the people who are doing this to them?

My guess is that the number of taxpayers who need to pay more in April will be more than 21 percent. There have been claims that the Administration and certain members of Congress want ordinary taxpayers to think that the 2017 tax legislation significantly benefits them, even though more than 80 percent of the tax breaks in the legislation accrue to large corporations and wealthy individuals. What better way to do this than to increase take-home pay through reductions in tax withholding? Happy wage earners will react in November, and then, in March and April, discover that some, perhaps all, of that extra take-home pay was nothing but a temporary boost in cash while they scramble to come up with money to pay the tax due on their returns. When this claim was raised in December, the Secretary of the Treasury called it ”another ridiculous charge." Tell that to the people who will be writing checks in March and April. But tell them now, or in September, or in October, when this information will be more valuable to them. Learning this in early 2019 will be too late.

So how did people react? According to this report from the Motley Fool, referring to a Jackson Hewitt survey that I cannot find online, most Americans did nothing. According to the survey, only 28 percent reviewed and updated their withholding, roughly 13 percent were unsure, and almost 60 percent had not done so.

The IRS had warned, as I had in different language, that “Waiting means there are fewer pay periods to withhold the necessary federal tax – so more tax will have to be withheld from each remaining paycheck.” At this point, very few people who want to change their withholding can do so. And those who can are limited in the amount of additional tax that can be withheld. Put simply, it’s too late. Unfortunately, in March and April many taxpayers are going to see a dollar amount on the “additional tax due” line, including many taxpayers who are accustomed to receiving a refund. An extra $10 or $20 per week, or $100 per month in a paycheck isn’t all that great if instead of an $800 refund a person needs to pay $600. At least some of the people facing this outcome might wonder or ask aloud, “So who’s getting those tax cuts?” By now, they would know the answer if they had been reading this blog. They would know that the answer might be articulated as, “Not you.”

Wednesday, December 19, 2018

The Disadvantages of Postponing Tax Increases

Local governments generally impose taxes to pay for services to their residents. Among those services are police protection, fire protection, hazardous material removal, street lights, traffic signs and signals, trash collection, recycling, libraries, snow plowing, and a long list of other benefits. Not every jurisdiction provides all of these services but all jurisdictions provide at least some of them.

Local officials continually explain their desire to avoid raising taxes. To do this, they cut services or find ways to provide the same services for a cheaper cost, which often causes a reduction in the quality of services. Over time, the cost of providing services increases as costs generally increase. Workers need raises to keep up with inflation. Materials purchased from third-party suppliers increase in cost.

What happens when the postponement of tax increases can no longer be maintained? An answer can be found in this report, which explains that the local property tax in Allentown, Pennsylvania, will increase 26 percent next year. One need not be a tax expert to predict the reactions of property owners. Yet there is another twist. Somehow, for 13 years, the city managed to avoid increases in the property tax. In retrospect, would taxpayers have been less upset if each year the property tax increases by roughly 1.7 percent? That amount of an annual increase is equivalent to postponing increases for 13 years and then raising taxes by 26 percent.

Different individuals have different preferences when it comes to dealing with price increases. Some might prefer small annual increases. Some might prefer waiting and taking the big hit. To make a good decision, a person would need to know at the outset what the increase 13 years later would be, and would need to know, or at least have some idea of, whether they could invest what would otherwise be the annual 1.7 percent increase and obtain a better than 26 percent return over the 13 years. Of course, it isn’t possible to have that information at the outset.

The worst aspect of this approach, of postponing increases until a large increase is necessary, is the inability or unwillingness of people to set aside funds to cover the possibility that this will happen. Of course, most taxpayers think that holding taxes constant will continue forever or that when taxes are increased, the increase will be small and manageable. Unfortunately, it doesn’t always work out that way.

Monday, December 17, 2018

Warped Perspectives on Tax Policy

Facebook is beginning to challenge television court shows as a provider of material for this blog. A few days ago, someone posted a meme that showed up on my newsfeed. It was a picture of several elderly gentlemen sitting on a bench, with the following caption: “After the age of 65 you should be 100% tax exempt. You have already more than paid your dues. Like and share if you agree.” Of course, I did not like or share the post. But I did comment.

My reaction to this meme was simple. It was a rhetorical question. I asked, “So those 70 year old billionaires would be tax-exempt? Really?”

The first response was a comment that failed to address the question. It was a typical me-focused, toss-aside-a-wider-perspective analysis, the sort that leads to stereotyping groups because of one person or incident. The response stated, “I just turned 65 and I've paid my fair share.” Was this response intended to imply that all people who have “just turned 65” have paid their fair share, whatever that might be? Does it distinguish between people who have attained the age of 65 and are wealthy and those who have attained the age of 65 and are destitute? Or does it lump together all persons who have attained the age of 65 without distinguishing economic situations even though the issue is an economic issue?

The second response was another example of this narrow, view-the-world-through-my-lens-and-ignore-the-wider-perspective thinking that is destroying not only the nation but the planet. The response stated, “I totally agree with these old gentlemen . Work your aaa off for over 45 years, pay more than your fair share and the Govmt , still taxes your partial pension, they screw you coming and going . And now they want to screw You again , while congress has all the perks of men and women who goof off.” Without defining “fair share,” this commenter went beyond the claim of the first commenter and decided the payment had been “more than” a fair share.

What particularly caught my eye was the complaint that “the Govmt , still taxes your partial pension.” To the extent that the pension is paid out of funds that have not previously been taxed, it is income. The extent of taxation depends on the amount of the pension. If the pension is a small amount, the recipient’s standard deduction, and in years before 2018, personal exemption deduction, most likely offset the pension, creating a zero income tax. Even adding in social security payments might not trigger an income tax liability. Of course, if the pension were higher, or when social security benefits were added in, the total was high enough, there would be an income tax, but it would be a smaller percentage than if the pension and social security payments were added to large amounts of investment or trust income. In other words, the income tax accounts, to a greater or lesser extent, for the economic condition of the recipient of a pension and social security. I tried to make this point in my response, in which I stated, “Not everyone who has reached the age of 65 has paid their dues. Age is one thing. Income and wealth and taxes are another.”

The observation that “they screw you coming and going” suggested to me that the person was complaining about being taxed on wages and salary and then being taxed on a pension or other retirement income such as social security. So I pointed the readers of the facebook thread to an explanation I had provided last year, in Does the Taxation of Social Security Benefits Constitute Double Taxation?, in which I wrote, in reaction to a claim that the taxation of social security benefits “represent double taxation”:

I disagree with the scope of [that] observation. . . .

My reason for disagreement rests on how the social security system works. Employees and employers make payments into the social security trust fund. Employees, when they retire or become disabled, and in certain instances their spouses, when they retire, and their dependents, if they are minors when the employee dies, receive lifetime benefits. Sometimes an employee collects less than what the employee paid into the system. One example is an unmarried employee who has no dependents who dies shortly before reaching retirement age. Far more often, though, employees, or their spouses and dependents, collect more than what the employee paid into the system.

When an employee collects more than what the employee paid into the social security system, the employee has income. It is fair to tax that income. The sensible way of doing this is to permit the employee to exclude social security benefits from gross income until the employee has received what the employee paid into the system. At that point, all of the benefits should be included in gross income. If those benefits are the retired employee’s entire gross income, the effect of the standard deduction and the personal exemption deduction would be to generate either zero tax or tax computed at the lowest rates. If the retired employee has substantial amounts of other income, the social security benefits would be taxed at higher, and perhaps the highest, rates.

Under the current system, some social security benefit recipients do not include any social security benefits in gross income, even when they receive more than they paid into the system. There is no double taxation in that situation. Others include some portion of the social security benefits in gross income, and often they live long enough so that the portion of social security benefits not included in gross income over the years is at least the amount that the person paid into the system. Again, there is no double taxation. Double taxation exists when the recipient dies before receiving back what was paid into the system, and yet includes some of the benefits in gross income. The reason for this inconsistency is that current law measure social security gross income with a bizarre formula that reflects the recipient’s adjusted gross income, certain adjustments, and varying portions of the social security benefits. Thus, some social security recipients encounter double taxation, but most do not.

Taxation of private retirement income, such as pensions, is not quite as complicated nor bizarre, but the overall concept is that the recipient is taxed on amounts paid into the retirement fund without being taxed at the time. This would include nontaxable employer contributions and employee contributions taken out of compensation and excluded from gross income.

It is unfortunate that much of the political and social unrest, including angry reactions to taxation, reflects a lack of a wider perspective that can be acquired both through formal education and through traveling outside the bubble, whether it’s a gated community, a closed social or religious community, or a neighborhood characterized by a singularity of perspective. Too many people think that when the encounter something, it becomes a truism. Thus, we observe people attaining a particular age and turning it into a category with attributes reflecting a singular or limited experience. So we see “I am over 65, I have paid taxes, I am being taxed on my pension, and I don’t have as much money as I would like” being translated into “Everyone who is over 65 should be exempt from paying taxes because [presumably] everyone over 65 is in the same position I am in because everyone over 65 is in the same economic position.” The flaw in the reasoning, if that is what it can be called, is obvious the moment thought is given to the proposition. The inability to view things from a wide enough perspective, reflecting a broad exploration of life, causes people to see things from a warped perspective, one that does not reflect all of reality. Here, I saw it with respect to taxation, but it exists not only with respect to economic issues but also with respect to political, religious, cultural, and social issues. It’s a narrowness of experience that become a narrow-mindedness of cognitive dissonance. It is a dangerous thing except for those who profit from the narrow-mindedness of the masses.

So it’s no surprise that a few days ago I encountered a rerun of a Judge Judy episode (Season 22, Episode 231) from earlier this year that involved a tax issue. That I did not see the episode when it originally airs simply demonstrates that I’m not always watching the television in hopes of finding material for MauledAgain!

The facts of the case were simple. A man and a woman lived together, did not marry, had a child, and separated. When they separated they entered into a separation agreement. They agreed that the child would spend half of her time with each parent, that each parent would support the child when the child was with the parent, and that no child support would be paid by either parent to the other. In the contract, the parents agreed that the mother would claim the child as a dependent for tax purposes in odd numbered years, and that the father would claim the child as a dependent in even numbered years.

The story became complicated when the mother went to jail for three months during an odd numbered year. During that time the child lived with the father’s parents because the father at that time was not employed. When the father filed his federal income tax return for that odd numbered year, he claimed the child as a dependent. He then paid the mother $1,000 to account for the fact that he claimed the child in a year that “belonged” to the mother.

The mother sued the father, seeking “the other $2,000” and the father counterclaimed for return of the $1,000 he had paid the mother. The father argued that the mother’s inability to support the child during the time she was in jail during the odd numbered year nullified the contract.

Judge Judy held that the contract was in force, and that the father had breached the contract. She held that he owed the mother $2,000 and that he was not entitled to receive back the $1,000 that he had paid.

Two questions popped into my head while watching the episode. I wondered, how did the parties compute the $3,000 of tax savings attributable to claiming the child as a dependent? My guess is that it was a combination of the reduction in tax due to the dependency exemption and the reduction in tax due to credits based on having a child as a dependent. Whether the amount reflected the decrease in the father’s tax liability, or what the mother would have saved had she claimed the child is unclear. I also wondered, did the mother claim the child as a dependent and then receive a disallowance from the IRS or did she know what the father had done and avoided complications by not claiming the child? The answer to that question was not provided during the show.

It is unclear if the parties had professional advice when they decided to enter into, and sign, the separation agreement. My guess is that the father did not have professional advice when he decided to claim a dependency exemption that he had agreed the mother was entitled to claim. It is very unlikely that the agreement contained a provision addressing what would happen to the dependency exemption if either parent was unable to take custody of the child for one-half of the year. Perhaps it should have had such a provision.

Wednesday, December 12, 2018

Another Tax Cut Failure

The December 2017 tax cut legislation has wrought all sorts of damage to the American economy. Some taxpayers not in the top one percent rejoiced when they received tiny raises or paltry bonus payments, but many of them, unlike the still-too-poor one percent, will be forking those dollars back to the Treasury come tax filing season in early 2019. Job numbers appear better, but it’s a short-term phenomenon and most of the new jobs are minimum wage opportunities. The federal budget deficit is growing as though it were on steroids.

Now comes more bad news. One of the claims made by the proponents of the always-failing supply-side, trickle-down economic theory was that the reduction in corporate tax rates would bring back into the United States money stashed overseas by corporations. Supposedly, the return of this money would create jobs, though the fallacy in that claim is that corporations do not simply create jobs because they have money, they create jobs if they need workers, and if the 99 percent cannot afford to purchase the goods and services offered by the corporation then the corporation doesn’t create jobs. At one point, the administration that pushed the 2017 tax legislation, despite having promised to push legislation that allocated all of the tax cuts to the 99 percent, claimed that the reduced corporate tax rates would cause $4 trillion in cash to come back into the country from overseas. Now comes news that, once again, reality trumps theory and boasting. According to this Bloomberg report, the repatriation of these earnings started off slowly and slowed even more. During the first quarter of 2018, the first after the enactment of the 2017 tax cut legislation, corporations brought $295 billion of earnings back into the United States. During the second quarter, the amount dropped to $170 billion, and the estimate for the third quarter is between $50 billion and $100 billion. That’s a total of $515 billion to $565 billion. That’s just about halfway to ONE trillion dollars, and it’s nowhere near FOUR trillion dollars. Not even close. And one doesn’t need to be a mathematician to figure out that each new quarter will bring diminishing amounts, so that after ten years it’s unlikely that much more than one trillion might be repatriated.

Many companies are keeping their cash overseas, and some have publicly announced that they are doing so. One reason is that many other countries impose “onerous” taxes when the money is taken out of their jurisdiction. I wonder if the architects of the “lower tax rates and the money will cascade into the United States” theory paid attention to the realities of a global economic marketplace. They were too busy, I think, selling the false claim that corporate tax rates in the United States were the highest in the world to pay attention to the reality of other countries’ exit taxes.

Monday, December 10, 2018

To Itemize or Not To Itemize

To me, the decision whether to itemize or not to itemize is an easy one to make. Yet for years the question has generated a variety of commentaries, articles, analyses, suggestions, and other explorations. The latest one that I’ve seen is It may be time to stop itemizing your taxes. The author provides “four things tax pros say could indicate that it's time to stop itemizing and take the standard deduction.” These are “1. YOU DIDN'T PAY A LOT OF MORTGAGE INTEREST. . . 2. YOU USED THE DEDUCTION FOR STATE AND LOCAL TAXES. . . 3. YOU DIDN'T DONATE A LOT TO CHARITY. . . 4. YOU DIDN'T HAVE HUGE MEDICAL EXPENSES.” Notice that the term “a lot” is used twice and “huge” shows up in one of the “things.”

For me, the answer is simple. Do the math. Add up the itemized deductions and compare the total to the standard deduction. Tax preparation software does that automatically. Yes, I know that the process of keeping track of itemized deductions requires some time and effort, but software used to track financial transactions also does most of the heavy work for that task. The significant itemized deductions are easy to identify: local real property taxes, usually paid once a year, charitable contributions, for which donees provide statements and the checkbook software tallies, mortgage interest, identified by a statement from the lender, and so on. When doing the math, “a lot” and “huge” are not numbers that enter the equation.

In the article, the author, after pointing out that “many taxpayers . . . ponder. . .” the question, suggests that “a major plot twist may make the issue even more vexing for some this tax season.” What is the “major plot twist”? The 2017 tax legislation increased the amount of the standard deduction. That will change the decision for some taxpayers but it doesn’t change the process. Do the math. It simply means that a different number is used to compare to the total itemized deduction number.

There are plenty of other “plot twists” in the 2017 tax legislation about which taxpayers need to worry. Most are disadvantageous to those who are not wealthy. It seems to me that the existence of “additional tax due” is going to be far more vexing for taxpayers than the simple task of comparing two numbers.

Friday, December 07, 2018

Conflicting Tax Provisions in Colorado Constitution Remain Unresolved

The Colorado Constitution sets a fixed ratio between real property taxes collected from assessments on residential properties and real property taxes collected from assessments on commercial property. For this to happen, the legislature must adjust rates each year as assessments change to maintain that fixed ratio. This means that unless total assessments on each class of property remain the same, the rate on one class will increase and the rate on the other class will decrease. However, the Colorado Constitution also requires that any increase in a tax or tax rate must be approved by voters. These two provisions create a conflict.

Because of the conflict between the two provisions, the governor of Colorado, following another provision in the state’s Constitution, asked the Supreme Court to determine which provision should take precedence. The governor was joined in making the request by various local taxing districts and state and local tax officials.

What did the Supreme Court of Colorado decide? According to this report, the court declined to provide an answer. The court simply issued an order that stated:

Upon consideration of the Interrogatories Pursuant to Article VI, Section 3 of the Constitution of the State of Colorado Propounded by Governor John W. Hickenlooper Concerning a Conflict between Section 3 and Section 20 of Article X of the Constitution of the State of Colorado filed in the above captioned matter, and being sufficiently advised in the premises, the Court announces that it will DECLINE the Interrogatories as propounded by Governor John W. Hickenlooper.

BY THE COURT, EN BANC, DECEMBER 3, 2018.

It’s anyone’s guess why the court decided to not answer the governor’s questions. I am tempted to joke that courts that are not tax courts don’t like to decide tax cases, but the issue presented to the court was not so much a tax issue but a question of interpreting constitutional language addressing a procedural matter.

In his request to the court, the governor pointed out that the conflict between the two provisions “has caused the system to collapse. . . .The effects have become so severe that they have started to cripple the ability of local government to provide essential services.” Several former lawmakers, including the chief proponent of one of the provisions, did not want the court to resolve the problem because they think voters should provide the answer. A committee already exists to study the problem and possibly propose changes to be submitted to voters, but the chair of that committee expressed disappointment that the court did not provide clarification. There is concern that any proposed change would face opposition in the legislature and from voters, in part because of the complexity of the existing language and the likelihood of complex language in any proposal. Concern has been expressed that the conflict will not be fixed until the inability of local governments to maintain revenues by re-balancing tax rates causes a catastrophe.

My question is how did this happen? How was an amendment to the Constitution put forth to voters when its provisions conflicted with language already in the Constitution? Surely multiple eyes looked at the language multiple times. It once again illustrates the shortcomings of the nation’s political systems.

Wednesday, December 05, 2018

The Challenges of Comparing Taxes

Recently, a facebook post came through my newsfeed. It was a picture of a person standing under an Ohio fueling sign, showing a price of $2.069 per gallon for regular grade gasoline, and $3.139 per gallon for diesel. Underneath, presumably written by the original poster, were these words: “Gas prices in eastern Ohio. Don’t worry Governor Wolf voters, this will never happen in PA. Very soon we will be taxed even more on our gas. Soon we could pay $1 more per gallon than Ohio. Thanks for voting Democrat!” Probably what prompted this reaction are Pennsylvania gasoline prices, which as of late November, according to the Daily Item were averaging $2.75. Yet without knowing the date on which the photo from Ohio was taken, nor if the station involved was engaged in a price war with a neighboring fuel outlet, the comparison might be an apples versus oranges situation.

According to Gas Buddy, the average price of gasoline in Pennsylvania at the beginning of December was $2.68, whereas in Ohio, it was $2.125. That’s not a $1 per gallon difference. How much of the difference is attributable to the difference in the gasoline tax? According to the Tax Foundation, in 2018 the per-gallon gasoline tax in Ohio is 28 cents, whereas in Pennsylvania it is 58 cents. That’s a 30-cent-per-gallon difference. The other 20 cents is attributable to other factors, not the gasoline tax.

But before concluding that Pennsylvania and one of its political parties are worse in terms of taxation than Ohio, it is necessary to consider other taxes. Pennsylvania has a very low state individual income tax rate, specifically, 3.07 percent. Ohio’s individual income tax system is progressive, and rates can reach 4.995 percent. Would Pennsylvanians be willing to pay higher state income taxes in exchange for a e0-cent-per-gallon reduction in state gasoline taxes? I don’t think so.

According to Wallet Hub, Ohio has the eleventh highest tax burden among states, measured at 9.48 percent, whereas Pennsylvania comes in twenty-third, at 8.66 percent. So people thinking of moving to Ohio to take advantage of a lower gasoline tax might find themselves worse off in terms of all state taxes.

The lesson is simple. Look not only at details or specific items, but also examine the big picture. Put things in context. Just because something makes for an entertaining tweet or a pithy sound bite doesn’t mean that it is correct, makes sense, or should be given credence. Comparing one tax in isolation might be useful for certain limited purposes, but it usually is a distraction, not unlike many tweets and sound bites.